Facebook Inc., a name everyone is familiar with has decided to step foot in the financial services industry. On June 18, 2019, Facebook announced its plan to roll out a digital currency called Libra in 2020. What makes it interesting is the fact that it’s not exactly like Bitcoin, however, it’s not paper currency either. It lies somewhere in between. According to the white paper published by Facebook, Libra is made up of three parts:
- It is built on a secure, scalable, and reliable blockchain;
- It is backed by a reserve of assets designed to give it intrinsic value;
- It is governed by the independent Libra Association tasked with evolving the ecosystem.
Since the core technology behind the digital currency is blockchain, it is similar to Bitcoin. However, because Libra is backed by a reserve of assets, it will not be as volatile as the bitcoin is and can be used for transactional purposes with greater efficiency.
The problem that Facebook is looking to solve here is that 1.7 billion adults globally remain outside of the financial system with no access to a traditional bank (but at least a billion of them have smartphones) and for those who do have access to these services for them the cost of remittance, the fees, account handling charges etc pile on to become a burden especially for cross border transactions.
And Libra is Facebook’s solution to the above-stated problems. They aim to create an ecosystem and give people access to financial services and more importantly create a global, open, instant, and low-cost movement of money, through the blockchain technology. The way they propose to do so is through a digital wallet called Calibra, which is like any other wallet, but instead of adding money through your bank, you would add Libra coins to the wallet and use it to pay for the services you avail. It is precisely for this reason that the Libra Association has partnered with 28 companies and NGOs including the likes of Uber, Lyft, Visa, Mastercard, Spotify etc. So the moment the Calibra wallet is launched we could use the Libra coins for these services.
The next logical question to ask is how does Facebook plan to make money off Libra. The fact that Facebook is in no way planning to make Calibra the only digital wallet to support the Libra currency, there are going to be other competitive digital wallets entering that space. Therefore the wallet services are going to be offered at nearly 0% commission. So is Facebook going to harness the user-generated data on the wallet, understand the consumer purchase pattern and use that data for advertisement purposes? The answer is NO. Facebook does not plan in any way to use this data for advertisement purpose, they mean to give to complete data privacy. (Or at least that’s what has been proposed so far.) Facebook’s plan to make money through the wallet is by providing additional financial services such as short term credit services. Secondly, they’ll be charging a fee of close to $10 million to the partners joining the platform, to keep it afloat. (Not all of the 27 partners have agreed to pay this fee so far.)
Apart from the revenue model and cost structure there is one big hindrance in project Libra. And that’s regulations. Facebook’s Libra cannot be issued in the U.S. without the official permission of the authorities. U.S. Federal Reserve Board raised concerns saying “Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability. These concerns that should be thoroughly and publicly addressed before proceeding”. Many people have even pointed out how Libra could be a serious competition to the US dollar itself and how it could eventually go on to affect the monetary policy of the country as well.
Since Libra is also not a traditional blockchain a key question arises, whether the system is truly decentralized and how it looks to fight the use of Libra for illegal activities? Facebook hasn’t given any specific answer to such questions yet, for all we know is the fact that Facebook won’t fully control Libra, but instead get just a single vote in its governance like other founding members of the Libra Association, including Visa, Uber and Andreessen Horowitz. The very reason that Facebook wants to take as much time as needed but follow all the regulations and more importantly convince the lawmakers regarding all their concerns related to Libra is that it will help the people to trust the ecosystem that Libra will offer and hence allow more and more users to come on board.
So, the final question. Can Libra become an alternative currency? The answer to that is YES. If Facebook is able to convince the people and the bureaucrats that their system is decentralized, will not lead to money laundering, fight against the shadow market and more importantly not become a system solely controlled by Facebook.
This is going to be a long battle for Facebook because it will not only have to convince the US but in order to utilize the full potential of Libra, it would need a lot of countries to be on its side. Once it emerges victorious in these regulatory battles there is a chance that it can go on to become the alternative currency. And I say chance because we also need to know that it’s not just Facebook but also the People’s Bank of China (PBoC), Walmart, Binance (Project Venus) and Pavel Durov’s TON all working on similar kinds of technology.